Wednesday, March 12, 2014

Can transformation close the gap?

转型能否弥合差距？夏伟文 & 陈薛卉 (30th Sept 2013)

In
less than seven years, Vision 2020 will reach its day of reckoning. The vision
aimed to propel Malaysia to developed nation status by year 2020. After
setbacks from few crises, particularly the Asian financial crisis 1997/98, can
the country still reached its target? Economic Transformation Plan (ETP) has
been formulated to help Malaysia to achieve rapid development. Yet, what are
the gaps between now and our dream in 2020?

ETP
itself has three main targets, namely “high income”, “inclusiveness” and “sustainability”.

High Income Target

For
the first target, it aims to achieve income per capita of USD15,000 or RM48,000
(thus, implying exchange rate of RM3.20 per USD being used). Based on World
Bank’s benchmark estimation using nominal value and Atlas method, Malaysia’s
latest income per capita for year 2012 is USD9,800, thus USD5,200 short of ETP
minimum target.

Various
projected growth rates from 2012 to reach the USD15,000 target in 2020 are
presented in Figure 1. With ETP 6% growth per annum, Malaysia will reach the
target. However, is the 6% projected growth rate too ambitious? Average annual
growth rate from 1962 to 2012 (all available years in World Bank’s data) is
only 4.21%. Taking a more recent estimation, average annual growth rate from
2000 to 2012 is even lower at 3.36% only. Both of these average growth rates
will fail to make Malaysia a developed nation by 2020. The most optimistic
approach is to take average rate on Asian Miracle years, namely between 1988
and 1996. The rate is 6.76% but do we expected those “miracle” will repeat
itself now?

Figure 1: Projected GNI with Various Growth Rate

Another
benchmark targeted by ETP is service sector accounting 65% of GDP. Based on
data from Malaysia statistical department, service sector contribution to GDP
fluctuated between 44.64% (lowest, recorded in 1998) and 52.37% (highest,
2001). Mathematically, service sector’s contribution need to increase at a
calculated rate of 1.57 percentage points per year from its 49.31% in 2010.
Historical trend from 1988 to 2010 recorded only an average growth rate of 0.17
percentage point per year. Service sector contribution grew most rapidly from
1988 to 2001. Yet, it grew a low average 0.5 percentage points per year. In the
most optimistic view, only average annual growth for all positive years since
1998 yields a rate (1.68 percentage points) to achieve ETP target.

ETP’s
inclusiveness target aims to enable all Malaysian to enjoy the fruits of
growth. In another words, it aimed to reduce inequality gaps. Focus will be
given to households from lowest 40% income group. Based on World Bank’s data,
the different between the forth 20% income group and highest 20% income group
averaged around 31%. The same different between the first and second lowest 20%
income groups is only averaged around 4%. Average income share held by lowest
and highest 40% are respectively 13.64% and 72.84%, hence creating an average
income share gap of 59.2%. Overall income disparity is shown in Figure 3 and
Table 1.

Figure 3: Malaysia’s Income share
Distribution

Table 1: Malaysia’s Income share Gaps
Analysis

Year

Different lowest 20% -
second 20%

Different second 20% -
third 20%

Different third 20% -
forth 20%

Different forth 20% -
highest 20%

1984

3.81

4.61

7.13

33.82

1987

3.79

4.62

7.20

32.18

1989

3.78

4.57

7.04

31.49

1992

3.75

4.73

7.49

32.48

1995

3.78

4.72

7.44

33.39

1997

3.76

4.72

7.46

34.03

2004

4.35

4.77

6.79

22.41

2007

4.03

4.98

7.79

29.91

2009

4.11

5.07

7.92

29.81

After
1997, income share of the richest group has fall drastically to 22.41% in 2004,
perhaps due to the Asian financial crisis. Note that no data available between
1998 and 2003. However, their share of income rose gradually toward 30% level
in 2009.

In
our previous article, we highlighted that “inequality” issue in Malaysia often
narrowly focused on inequality between ethnic. Thus, no surprises that one of
the Strategic Reform Initiatives (SRIs) in ETP, namely “narrowing disparity”,
only aims to improve Bumiputera representation in market equity, employment,
high value-added occupations, and management positions.

Yet,
inequality should be viewed in wider scopes which include inequality between
states and sectors. For example, agricultural sector only contributed 10.6% of
Gross Domestic Product (GDP) in year 2010 as compared to manufacturing (26.1%)
and services sector (32.3%). Besides commercial agriculture like palm oil and
rubber plantation, income earned in this sector is relative lower.

In
term of geography disparity, Malaysia Statistical Department estimated that in
year 2010, Kuala Lumpur has the highest GDP per capita at RM55, 951. That is
about 6.8 times more than Kelantan, the lowest at RM8, 273. Kuala Lumpur GDP
per capita almost doubles Penang, the second highest state. Sarawak and
Selangor come third and fourth highest.

Sustainable Target

One
of the criteria for sustainable development is manageable debt level. Debt may
be needed when saving is insufficient to reach needed investment level.
Continuous threat of global recession has also prompted the government having
deficit budgets, which are financed by debt. Yet, two questions are important.
First, is the government spending prudent and necessary? Second, is the current
debt level alarming?

An analysis of operating versus development
expenditure reveals ineffective government’s spending pattern. Based on data
from Ministry of Finance, Figure 4 and Figure 5 show that operating expenditure
is higher than developing expenditure except for year 2003. The gap is getting
wider since 2003, averaging about 1.55 times for years between 2004 and 2012.

Figure 4: Operating versus Developing
Expenditure

Figure 5: Operating – Developing
Expenditure Ratio

High
operating expenditure is burdening the government, thus public sector should be
reduced in size but increase in efficiency. In addition, it is important that
the Strategic Reform Initiatives (SRIs) of “Public Service Delivery” fully
utilized information technology automation and reduce redundancy. It is good
that PEMANDU revealed that a total of 49 licenses have been either abolished or
identified to be abolished to reduce redundancy and create clear governance
structure.

Under
“Public Finance Reform” SRIs, ETP targets to reduce fiscal deficit to 3% of GDP
by 2015 and near budget neutral by 2020. Can we achieve this target given the
trend as shown in Figure 6? Since 2008, we have five consecutive years of
deficit, the worst being in 2012 (latest available data year).

Figure 6: Ratio of Budget Deficit
(Surplus) to GDP

ETP Plan and Strategies

Increasing
Gross National Income (GNI) is always main focus of ETP. It is necessary but
not the only factor to enable equality and sustainability. Top six EPP from
various NKEA are listed in Table 2.

Table 2: Top Six EPP Contributors of GNI

No

EPP

NKEA

GNI added in 2020 (RM million)

1

Attracting the right
mix of internal & external talent

Greater KL/KV

118,212.1

2

Attracting 100 of the
world’s most dynamic firms within priority sector

Greater KL/KV

41,440.5

3

Solar electronic
(silicon, wafer & cell, and module producers)

Electronic and
Electric

14,194.6

4

Improving energy
efficiency

Oil, Gas and Energy

13,925.7

5

Pushing generics
(healthcare) export opportunities

Healthcare

13,853.7

6

Increasing the (palm)
oil extraction rate

Palm Oil

13,711.1

All
EPPs have GNI target but Greater KL/KV NKEA seem to be obvious contributor.
Therefore, will this help achieve economic balance between geography (states in
Malaysia)? In addition to EPP, five economic corridors help to increase
national income too but also in favor of Kuala Lumpur / Klang Valley and
industry or service sectors. Exceptions are NCER that does focus on agriculture
and “oil and gas” plans under ECER may benefit the two less developed states of
Terengganu and Kelantan.

NKEAs
such as modern agriculture, wholesale/retail, palm oil and tourism could help
achieve inclusiveness if they give priority focus on rural or relatively less
developed states in Malaysia. It will be better if micro-financing is included
in Financial Service NKEA to fight poverty. In order for ETP to be success,
some areas need to be considered too. For examples, ETP need to solve brain
drain, corruption and wastage in economy.

Conclusion

In
summary, time does not wait for anyone while uncertainty of global politics and
economy pose danger to our economic dream to be developed nation by 2020. ETP
may have it comprehensive plan to bring us there. Yet, can it bridge the gaps
between now and targets level for 2020? More efforts certainly needed.

[Chinese version published at Nanyang Press, 30th September 2013. Available online at http://www.nanyang.com/node/567909. This English version may be slightly different from the Chinese online/printed newspaper version]

1 comment:

Impossible 6% growth of GDP per year; failure in reducing the inequality gap after 7 years; inefficiently of government cause the operating spending more than development expenditure. Obviously, ETP had failed in acting its role to help Malaysia achieve rapid development.